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Journal number 2 ∘ Mariam Lashkhi Sopio Ogbaidze Mariam Lashkhi Vakhtang Charaia

DOI: 10.36172/EKONOMISTI.2022.XVIII.02.M.Lashkhi.S.Ogbaidze.M.Lashkhi.V.Charaia


The main objective of the research paper is to analyze the existing means and methods of obtaining funding for startups in Georgia presented by the private sector (commercial banks, microfinance organizations, angel investors, venture capital funds, etc.), donor organizations (international foundations and institutions), and the state. The methodological approach involved conducting in-depth interviews with various funding program beneficiaries and fund managers presented in Georgia and distributing a questionnaire to start-uppers who have at least once pursued grant funding. The study aimed to identify opportunities and challenges for startups at each stage of the business lifecycle and formulate relevant recommendations. 

Keywords: Entrepreneurship, access to finance, start-uppers, startup funding, business lifecycle 


Innovation and knowledge spillovers that these ingenious inventions induce are one of the most important sources of economic upswing. In the contemporary world, innovation constitutes the main axis of a country’s economic growth and, to a certain extent, serves as an accelerator of this process. In the 21st century, knowledge and innovation have a pivotal role in the economic growth dynamics of both developed and developing countries, including even those indulged in natural resources as the invaluable assets in the 21st century are human capital and commercialization of its knowledge. According to The World Bank research, integrating innovation into any industry triples the effect of increasing private sector revenues and makes the education system more efficient.

Innovation and R&D can be promoted both indirectly (for example, through fiscal incentives – government tax abatement) and directly via grants, loans, co-financing. In order for Georgia to become more competitive in the international arena, it is indispensable to have a variety of programs that would encourage budding start-uppers to enhance their ideas, turn them into a commercially profitable business and then upscale it on a competitive global market.

To measure an entrepreneurial ecosystem, five key components need to be considered: a) legislative environment fostering innovation, b) knowledge accessibility, c) finance accessibility, d) physical infrastructure promoting innovation, and e) market accessibility.  Without inclusive development of these five components, it is impossible to establish a healthy and successful startup ecosystem in a country. 

Literature Review

Entrepreneurship can be defined as the ability of individuals or groups of individuals to create or discover opportunities and utilize them to the benefit of economic well-being [1]. Researchers and practitioners recognize that new successful projects play a significant part in a country’s economic upswing. Entrepreneurship creates employment opportunities, shapes the political and social environment, and contributes to the growth of a country’s competitiveness. Entrepreneurship can be defined as the creation of a new or essentially improved product, service, or method of production through the implementation of new technology.

With the intention to examine the process of creating prosperity, Adam Smith emphasized that the division of labor is limited by the extent of the market, the growth of which, for its part, leads us to the demand for innovation. This latter necessitates a better distribution of labor resources and increased productivity. On the other hand, Ricardo argued that the main determinants of economic growth include labor, land, and capital, and in his theory of economic growth he completely neglected technological progress [2].

The practice has shown that it is technological progress that generally entails rapid economic growth (so-called boost). However, this can as well be viewed as a two-sided argument. The first standpoint highlights that technological progress results from economic activity while the second outlook implies that technology and knowledge are characterized by increasing returns with a succession of economic growth [3].

Economic growth can be defined as the process of quantitative growth and improvement of national production and its macroeconomic outcomes, which can be achieved through fully exploiting available resources [4].

Access to finance at an early stage often plays a vital role in creating a healthy entrepreneurial and innovative environment. It is at that point that it becomes evident that a startup has the potential to transform into a large-scale company and offer quality products, create employment and establish its presence in the international market [5]. There are various ways to raise funds both for budding and already established entrepreneurs that aim to improve the entrepreneurial ecosystem by bringing together entrepreneurs with insufficient capital and business know-how [6].  

There is a range of private and public programs with the following primary goals:

  • To support startups financially and assist them in business management;
  • To connect startups with various private investors and the international market;
  • To develop the country’s venture capital ecosystem;
  • To provide startups access to new means and technologies to promote upgraded products and services on the market;
  • To create employment for highly productive and tech-savvy people.

With its robust start-up ecosystem, Ireland has become home to many success stories. By fostering innovation culture, it has reached the top spot in the Global Innovation Index. Today, Ireland effectively operates world-class business hubs and accelerators with Fintech, Biotech, Med-tech and ICT directions [7]..

Regarded as an entrepreneurial powerhouse, Israel has the largest number of startups per capita in the world [8] with its startups collectively bringing a total of $6.47 billion benefit in 2018. Tel Aviv ranks third globally in the number of AI startups exporting $6.5 billion worth of cybersecurity products per year (Startup Genome).

The UK represents the 3rd largest tech hub in the world holding the leading position in Europe. Being named the third-best in the global startup ecosystem, London has emerged as the world leader for crowdfunding. The UK puts forward crowdfunding as an additional source to other traditional funding unlike Italy where crowdfunding substitutes traditional ways for startups at the seed stage [9]. The UK Crowdfunding Association (UKCFA) was formed with the purpose to bring together individuals and businesses who regardless of their small finances can actually contribute to big changes in the industry.

Georgia has ranked 7th in the world for ease of doing business by 2020 [10] leaving countries such as Ireland, Great Britain and Singapore behind. With regard to competitiveness, our neighboring countries are slightly ahead of Georgian [11]. However, with its 71.8 points, Georgia was classified among the countries enjoying greater economic freedom with a competitive edge over the S. Caucasus countries of Azerbaijan (66.2) and Armenia (68.5) [12]. 

Research Methodology

The study is divided into three stages: desk research - comparative analysis of existing practices and international experience in Georgia; qualitative research - interviews with various funding program beneficiaries, fund managers and start-uppers; and, recommendations drawn upon the gathered data analysis.

Stage I –description of the international trend and the current situation in Georgia –Ascertain what types of funding (investors, banks, micro and macro financial organizations, funds, etc.) and conditions entrepreneurs pursue to obtain financial backing at different stages of their startup development (desk research):

  • Task 1 – literature review of international practices,
  • Task 2 – Ascertaining current practices in Georgia,
  • Task 3 – Comparative analysis of international experience and Georgian practices.

Stage II – the aim of the study is to identify ways of getting funding and determine the accessibility of traditional and alternative financial sources (qualitative research):

  • Task 1 – exploring and evaluating traditional sources of funding, conducting interviews with ten different Georgian top project managers with various professional backgrounds, such as banking, international donor organizations and etc.
  • Task 2 – distribute a questionnaire to start-uppers who have at least once pursued grant funding. The conducted survey involved 16 start-uppers. The collected qualitative data was analyzed for further research.

Stage III – Conclusions and recommendations– analyze the challenges start-uppers face in Georgia in terms of access to finance and what measures private and state agencies need to adopt to enhance the existing startup ecosystem. 

Assessment of Existing Investment Environment in Georgia

In 2004, Georgia embarked on a liberal economic policy that eradicated bureaucratic obstacles and eased the tax burden. According to the Ease of Doing Business Report published by the World Bank, Georgia has been recognized as one of the leading reformers in recent years ranking 7th among 185 countries worldwide [13].

Despite its advantageous position, Georgia still faces a number of challenges that hinder its stable, diversified and sustainable economic growth, which could be explained by the investment development path and Georgia’s achievement in it [14]. Today, the important tasks of Georgia’s economic advancement are connected with free competition, insolvency, resolutions of commercial disputes and other business-related issues. These unsettled matters cause Georgia lag behind other countries and contribute to investors’ distrust which, in turn, prevents foreign direct investment inflow into the country at some level.

As stated in the World Bank Business Report, Georgia ranks second in the world in terms of its ease of registering property; however, the significance of this fact fades when property rights are unduly infringed and the possibility of resolving legal disputes promptly is limited. At the same time, challenges occur in such areas as market size, availability of qualified labor force, access to finance [15] and other.

To ensure an attractive entrepreneurial and investment environment, legislative and institutional changes need to be made and the independence and efficiency of the judiciary should be strengthened. It is also a precondition for the protection of property rights

Strengthening property rights protection - First and foremost, this requires the independence of the judiciary and enhancement of existing mechanisms for intellectual rights protection.

Government support for entrepreneurship development – The LEPL ‘Produce in Georgia’ was implemented with the aim to improve the entrepreneurial environment, develop the private sector, promote Georgia’s investment climate and boost export.

Investment Legislation Refinement - Georgia’s current investment legislation is outdated and disconnected from reality.  The rapid technological advancement in the world has necessitated the enhancement of investment legislation enabling Georgia to improve its competitive position in the world market. Along with the investment legislation the fintech ground should be created, which is still a matter of discussion [16, 17].

With the support of the Innovation Agency and international financial institutions (IFI), donors, alterations are to be made to the Law of Georgia on Securities Market to incentivize crowdfunding. Creating alternative funding and approving the abovementioned amendments in the law by the Parliament and a regulator - the National Bank of Georgia (NBG) is crucial.

According to the Doing Business report (2020), innovation strategy faces several important challenges in the ICT sector. The report states that despite Georgia’s ambitious strategy to export ICT products to the international market, there is still much to be done for both legal and technology readiness.

Regardless of its fast-paced development, Georgian startup ecosystem has not yet become the destination for any unicorns, i.e. private global multi-million companies. Hence, the Georgian government is actively involved in maximizing the sector’s competitiveness, albeit the challenge remains.

The list of legislative initiatives to support innovation is as follows: 

  • Harmonize the investment legislative framework with the Western model
    • Make amendments to the Law of Georgia on Securities market to encourage investment in startups/ risk capital.
    • Modify the Law of Georgia on Collective Investment Undertakings to facilitate risk capital formation.
    • Establish legislative framework for alternative funding (crowdfunding) to structure equity and loan funds.

The role of offshores in startups has become prevalent in recent years as in any other investment direction. However, a favorable business climate and investment incentives/ initiatives might be one of the necessary components for registering companies and maintaining intellectual resources (cash flow) in the country.

  • Tax exemption when investing in risk capital/ innovation/ research and development (England model 60% guarantee scheme).
  • Tax benefits for startups – this initiative poses some fraud risks; carefully designed benefits and conditions deterring fraud can be drawn upon the foreign best practices.
  • Government initiatives including co-investment and guarantee schemes for risk capital.
  • Legislative ‘sandboxes’ to test/regulate legislative initiatives.
  • Possibility of free trade zones.

Along with sufficient competencies and profound knowledge, entrepreneurial skills are recognized to be the most defining components to ease access to finance. One of the most compelling reasons why investors might feel reluctant to invest.

Including entrepreneurial skills in vocational and formal education remains the main challenge for the Georgian education system. Scarce is the list of universities that have integrated this new challenge into their curricula. Shaky and unsystematic skill-based vocational education in the county consequently reflects insufficient funding initiatives that lack sustainability.

Business incubators and accelerators serve as the most effective method of business skills training [18].  In this regard, the world’s top accelerator 500 Startups has already started operating in Georgia; in addition, there is an ongoing Venture elevator program co-sponsored by the US Embassy. In order for similar initiatives to have a systematic nature, the following measures need to be taken: Popularize vocational schools; Integrate modern technology in teaching; Broaden ICT knowledge and upgrade curricula to meet international standards; Raise awareness of property rights; Implement entrepreneurial competencies in formal and non-formal education programs; Establish a pre-accelerator program on university premises; Establish accelerators and incubators [19].

Access to finance remains one of the recognized hindrances to business development in Georgia [20].  Bootstrapping still remains to be the common choice among start-uppers who feel reluctant to refer to banks for financial support due to their high-interest rate. On top of that, the national savings rate is significantly low making investments generated through savings almost nonexistent.

The lack of financial markets is another daunting challenge in the country. Thus, financial institutions and markets need to be strengthened and regulatory instruments - refined allowing start-uppers to borrow ‘cheap money’ for their business. According to the survey conducted by the World SME Forum, 50% of Georgian start-uppers name access to the market as the main challenge, 40% say it is access to finance, and the remaining 10% consider access to knowledge to be an issue, which is proved by other local researches including Kvirkvaia et all [21]. 

Research Results and Interpretation

As part of the research, a survey was conducted to bring to light the challenges and obstacles Georgian start-uppers face in terms of financial access. A total of 16 start-uppers from various fields were interviewed who at least once tried to seek financial backing either at an idea-generation stage, market penetration or expansion stage. 

Diagram 1 - Which field does your startup belong to?

25% of respondents have a minimal practical product and have already started selling it.

As a rule, having information access to traditional and alternative funding opportunities is a reliable indicator of how well-developed each direction is in the country. Therefore, the pertinent questions we asked to the start-uppers were whether they were aware of the types of funding programs operating in Georgia and whether they have ever participated in any.

 Diagram 3 - Do you have a minimum viable product? Diagram 2 - Have you started selling the product?

As the survey disclosed, the largest proportion of start-uppers was well-informed about the state programs, investment funds, and commercial banks. The half of those surveyed had some experience of participating in state-funded grant competitions, while only 18.75% have applied for investment funds, leaving commercial bank loans behind. 

Diagram 4 - Which funding programs operating in Georgia have you heard about?


It should be noted that, even though the vast majority of the respondents are informed about the commercial bank loan offers for SMEs, this alternative still remains as least desirable. This can be explained by the fact that at the initial stage of their business, start-uppers avoid accumulating a loan and find it safer to receive financial backing in the form of grants. On top of that, as already mentioned, bank interest rates in Georgia are quite high compared to other developing countries, which puts a lot of pressure on start-uppers when doing business. 

However, it becomes important to specify the most popular types of funding among Georgian start-uppers at different stages of doing business. Consequently, the following question in the survey intended to identify financial backing sources Georgian start-uppers have pursued.  

As the survey indicated, at an idea-generation stage is it most common among start-uppers to seek help from friends and family or angel investors. This seems to be quite rational as emerging entrepreneurs search for individuals who would believe in their innovative idea’s commercialization potential without seeing a detailed blueprint. Once the minimum viable product is ready to enter the market, investment funds come into play requiring a well-developed business plan and a prototype from a start-upper. 

Diagram 5 - What type of investment have you applied, at each stage of startup development?


At the expansion stage, both emerging and established startups turn to banks as they feel they can now afford ‘more expensive loans’ due to the existing market demand for their product, an assembled delivery system and the stable income they already generate. Similarly, banks consider lending to such business clients less risky fueling the confidence of a start-upper to apply for a loan. It is also interesting to find out how many investors start-uppers have turned to at all these three stages and whether they have presented their business ideas/plans to them

Diagram 6 - How many investors you have submitted your project, at each stage (percent)


As it can be seen from the pie charts, 56% of the respondents have never sought funding at the idea-generation stage choosing self-financing over it. However, it is noteworthy that the percentage of this component is higher at the following two stages: market entry and business expansion. As the survey showed, the majority of the interviewed start-uppers have presented their business plan to one investor/company at all these stages.  This may indicate that firstly, submitting all necessary documents to one program/ investor is energy- and time-consuming; secondly, start-uppers are not informed about different types of available investors; and lastly, there are insufficient traditional or alternative funding sources in the country.

It is interesting to know what type of investor offers the most funding to start-uppers at each stage; in this case the circumstances under which the funding is offered are spurned. 

Diagram 7 - Which investor offered you the most funding, at each stage of development?


At the idea-generation stage, angel investors, friends and family, crowdfunding and state programs provide the most funding. The picture changes for the following stages: at the market entry stage start-uppers receive the most funding from state programs, while at the market expansion stage commercial banks are more present.  46.67% of respondents assess the existing entrepreneurial environment in Georgia as neutral, 23.33% - as bad or very bad, and only 20% consider the entrepreneurial climate positive. 

Diagram 8 - How would you assess the entrepreneurial environment in Georgia?


According to the interviewees, the most powerful factor that influences an investor’s decision-making is knowledge of the field rather than instinct and benevolence; however, in the end, all of these factors play a crucial role when making a decision in favor of a start-upper. 

Diagram 9 – Factors influencing an investor’s decision?


Apart from financial back up, start-uppers tend to expect investors’ support in many different ways, be them issues related to strategic and business planning or operations, ease of market access, and other. After obtaining funding, the average frequency of communication between the surveyed start-uppers and their investors on matters of business and strategic planning was 3.5 times per month and 1.5 times – on operational issues. At the market entry stage, the average number fell to 1.75 for strategic planning and 1.5 for operational issues. The number reduced even further at the expansion stage when the average communication frequency became 1.63 times a month on the matters of strategic planning and 0.7 -of operational issues. Interestingly enough, 62.63% of respondents did not negotiate their steps with the investor at all after obtaining funding, 6.73% did so only verbally or in writing, and only 30.64% met the investor in person to talk over their decisions.

53.85% of the respondents did not have any expectation to receive any support from the investor in terms of market networking, 21.77% were disappointed, 12.56% had their expectations partly met, and only 22.9% enjoyed the expected support in full. 

Nearly half of the surveyed (46.97%) did not have high hopes to be offered any mentoring or recommendations by the investor during their activity period. 26.26% did have optimistic expectations, but were disillusioned. The expectations of 12.13% were slightly met, while only 14.65% received the support they expected.

67.78% of interviewed start-uppers were not hopeful to get any help from the investors on operational matters, 8.84% felt they were let down, 5.81% had their expectations partly met, and only 17, 68% felt delighted to have received the support they expected. 

Diagram 10 - Reasons why you would no longer participate in startup funding programs.


The survey also revealed the types of legal issues the start-uppers faced when doing business. The vast majority of the surveyed start-uppers believe that high tax is the most destructive factor, especially at the early stage of product sales when they have not yet started generating any income. Similarly, the start-uppers in the food business consider nutrition practice laws unacceptable and believe they need immediate reconsideration.

Regardless of the thorny issues listed above, most start-uppers acknowledge that the recent years have been marked by the government’s repeated attempts to help businesses progress by constantly offering novelties, projects, or programs tailored specifically for their development and commercialization. Having the coronomic crisis [22] factor in mind and the knowledge of entrepreneurial activities and cultural factors in the modern conditions of globalization is key for sustainable economic development of Georgia [23].

Conclusion and Recommendations

The initiative of the Government of Georgia to build a strong startup ecosystem is actively underway. Not only does the government provide various types of grants/loans, but also it encourages the private sector’s maximum involvement in the process and tries to create a favorable environment for foreign investors.  Despite having taken big steps forward for the last decade, there are still some issues that need to be tackled.

A safe business environment and favorable investment climate need to be created that will result in attracting various international investors, diversifying and varying alternative funding sources so that the country no longer relies heavily on state programs. Moreover, the legislation on dispute resolution should be amended, according to the best international experience.

As the survey depicted, early-stage startups that have not yet started generating profits are taxed heavily which prevents them from starting a business. Therefore, the existing legislation needs revision and consolidation to provide favorable conditions to startups.

As the international practices show, with its transparency and affordability crowdfunding serves as a powerful impetus for emerging start-uppers all around the world. Since the legislation of Georgia does not regulate the possibility of obtaining crowdfunding, Georgian start-uppers are deprived of this type of financial backing. However, the Innovation and Technology Agency in cooperation with the NBG is currently working on legislative changes that will make crowdfunding possible. Start-uppers need to be well-informed about internet funding alternatives, but before that, effective legislation needs to be enacted to detect and prevent possible misuse of funds and safeguard investors.

One of the core components of investment growth in Georgia is to stimulate savings.

It is also of utmost importance for private investors to be able to offer affordable convertible loans to start-uppers and for the country to offer alternative sources of funding.

To test its legislative initiatives, the country now can consider the emergence of ‘regulatory sandboxes’ together with free trade zones in order to support tax exemption. 

The role of the private sector in funding startups needs to be increased; the prerequisite of this can be establishing a risk capital market legislative framework and offering tax incentives for investment in innovative businesses.

In addition to expanding the donor and IFI’s programs base, it is also necessary to adapt traditional programs to innovation challenges and sharpen tools facilitating entrepreneurship. 


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